Choppy rise as data soothes crude spike

Kevin Pendley | Aug 26, 2008 10:22am EDT | Comment

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Small-cap stocks were modestly higher in choppy morning trade, as investors juggle several cross-currents, including a sudden jump in crude oil prices and a fresh batch of economic data that seemed slightly better than feared. At 10:06 a.m. ET, the Russell 2000 (NYSE:IWM) was up 3.49, or 0.48% at 724.03.

New Home Sales were pegged at an annual rate of 515,000 units, which was below the 530,000 forecast. The single-family home sales rate for June was the lowest since September 1991. Meanwhile, Consumer Confidence came in well above the forecast, with the headline figure at 56.9, compared with the projection of 53. The U.S. dollar edged slightly higher after the confidence report, but did not take out the overnight high against the euro.

The Case-Shiller Home Price Index was slightly better than the forecast, coming in at minus 15.9%, compared with the projection of minus 16.2%. In addition, the velocity of declines is slowing and there were some pockets that edged higher, which will foster some hope of a bottom for the beleaguered housing sector. Still, the report shows that home prices in metropolitan areas continue to fall at a record annual pace.

The U.S. dollar climbed to new move highs in overnight trading, pulling to the highest point since February against the euro. After this morning’s run of economic data, the dollar remained firm, which helped pull money into U.S. equities. In addition, the yield on ten-year notes and bonds was higher, suggesting money flow into stocks versus fixed income products.

Crude oil bounced about 30 minutes ahead of the U.S. stock market opening, boosted by concerns that Hurricane Gustav could trek toward key production areas in the Gulf of Mexico. The Gulf harbors about 25% of U.S. crude production and some 15% of natural gas production. Crude oil prices climbed back above $117 a barrel, shooting more than $2 into the green, and up more than $3 from overnight lows.

Even before the regular U.S. opening, stocks were on the defensive overnight despite the firm U.S. dollar, pulled down by an equity selling mentality in Europe and in Asia, where bank stocks, energy shares and mining companies were on the defensive. In addition, the Russian stock market was down some 5%, and instability there could spark additional strength in energy markets.

Broad market sectors on the decline this morning included homebuilders, restaurants, electronic component makers, department stores, home improvement retail, automobile manufacturers and footwear shares. On the upside, oil exploration, thrifts, coal, oil refiners, oil and gas drillers, gas utilities and oil and gas storage stocks were the top performers.

Individual small caps on the move were highlighted by Daktronics Inc. (Nasdaq:DAKT), which gapped higher and rose some 10% on cheery earnings results. iPCS Inc. (Nasdaq:IPCS) was up some 9%, trying to recover from move lows forged recently. Chico’s Fas Inc. (NYSE:CHS) was up 11%; even though the women’s apparel company posted a sharp decline in net income the result still topped the estimate. On the downside, MedQuist Inc. (Nasdaq:MEDQ) was down 8%, but volume was very thin on the stock.

Looking at the chart picture, Monday’s slide through key support at 726 was a troubling development for the bulls and fortified recent bearish patterns on daily and weekly studies. The market is hovering near the next logical support zone at 720.50, and persistent action below that point would open the door for a run toward the recent intraday bullish pattern lows near 711.50. There is support along the way today at 714.50. On the upside, resistance comes in at the aforementioned 726 line, then at 734.